7 Areas Every Family Office Needs to Focus On
By Chris Beringer and Delaney George
When it comes to family offices, the old adage holds true: 'When you’ve seen one, you’ve seen one.' The industry is exceptionally unique, given each family’s distinct culture and individuality. However, amidst this diversity, certain key aspects remain consistent across all families. To ensure optimal business success, a family office should prioritize the following seven areas.
1. Family Conflict
A sound family office structure has the ability to keep families together, eliminate current/future conflicts and allow the family to maximize financial objectives while minimizing family discord.
Even if a family believes themselves to be exceptional and immune to disagreements, being properly prepared for potential conflicts is crucial. Conflict has the potential to tear families apart and derail their objectives.
To mitigate family conflict, effective planning is crucial. This involves establishing a comprehensive family mission statement that encompasses long-term goals, including aspects such as family culture, financial objectives, charitable endeavors, decision-making policies, and distribution policies. Additionally, implementing a culture of transparency is essential to foster open communication and trust among all family members, regardless of the significance of the information shared. Another way to reduce potential conflicts is to ensure that all beneficiaries receive clear explanations of legal documents that affect them. When everyone understands the meaning and intent of the documents, there is less room for misinterpretation or confusion. This can prevent unrealistic expectations or disagreements about a document’s purposes, what a document permits, and what the responsibilities of its fiduciaries are. Furthermore, early education and thorough preparation of future successive generations are essential components in building understanding, resilience, and harmony within the family structure.
2. Asset Protection
Being proactive and planning for unforeseen circumstances is essential for safeguarding financial assets. To shield your assets from marital disputes and potential lawsuits/liabilities, consider placing them in entities that provide protection from creditors, such as trusts and /or legal entities like partnerships or LLCs. This strategy ensures that your assets are passed on to your intended beneficiaries. A biannual review of property and casualty (P&C) insurance policies is recommended to make sure all risks and assets are being appropriately covered (e.g., homes, collectible cars, boats, antique guns, jewelry).
Moreover, evaluating the appropriate levels of umbrella coverage is recommended to ensure continued protection once the limits of other insurance policies are reached. Whenever possible, opt for nonrecourse loans. Nonrecourse loans offer protection by limiting the lender's ability to pursue assets beyond the loan collateral. In other words, the lender should not be able to attach assets to the loan collateral to recover the debt owed.
3. Estate Planning
Preserving generational wealth requires careful planning to avoid losing a significant portion of one’s assets to transfer taxes due to inadequate preparation. To minimize estate tax liabilities, it's important to maximize the use of GST exemptions. Additionally, consider utilizing tax-saving asset transfer techniques like Grantor Retained Annuity Trusts (GRATs) and Charitable Trusts for a tax-efficient wealth transfer. GRATs can facilitate transferring assets to beneficiaries with minimal or no gift and estate tax implications. Meanwhile, charitable trusts function by making defined payments to beneficiaries and/or charities for a period of time and then to designated beneficiaries.
4. Investment Management
Effective investment management is critical and must be aligned with the family's long-term goals. For example, the investment approach for a family with a 100-year wealth plan will differ significantly from that of a family with a 30-year time horizon. When making investment decisions, it's essential to adhere to sound investment principles and conduct thorough due diligence. Additionally, it's important to acknowledge that sometimes the “best” investments are the ones you opt not to pursue. Even if an investment appears promising initially, a comprehensive analysis may uncover risks or drawbacks that outweigh potential returns and are not consistent with the family’s goals and objectives. While private investments can provide attractive returns and diversification opportunities, they often entail higher risks and lower liquidity compared to public market investments. Therefore, it's important to establish the necessary infrastructure for evaluating and overseeing all investment opportunities effectively.
5. Cost Management
Managing costs effectively is crucial for preserving wealth over time. One approach to cost management involves targeting an average total infrastructure expense of an established percentage over five years. A general rule of thumb is to allocate 1% of total infrastructure per year over five years. This encompasses various elements such as the expenses associated with maintaining a family office staff, investment fees, accounting fees, and legal fees. However, it's important to note that it can be acceptable for these fees to be higher, particularly if the investment platform is actively involved in private investments. In such cases, the higher fees may be justified by the potential returns and benefits associated with these types of investments.
6. Excessive Distributions
Establishing sound distribution policies is essential for maintaining long-term financial stability. Such policies serve as guidelines for how assets (income and/or principal) are distributed over time, ensuring that resources are managed effectively to sustain wealth for future generations. Distribution policies must be not just standalone guidelines but should be deeply integrated into the family's overarching mission statement and values. This integration helps ensure that financial decisions are aligned with the family's broader objectives and aspirations.
During challenging market conditions, exercising caution becomes even more important. To maintain assets in perpetuity a distribution policy should be around 3% of total assets. This helps reduce the risk of depleting assets prematurely or encountering financial hardships during market downturns.
7. Exponential Growth of Family Members
As a family grows, resources are divided among more members, which can impact the distribution of wealth within the family. It's important to anticipate how this growth will affect wealth distribution. One proactive approach is to aggressively grow the family's wealth to ensure future generations can maintain the same standard of living enjoyed by current ones. Alternatively, families may choose to focus on securing a stable foundation for future generations, acknowledging that they may not inherit as much as previous ones.
Whether you intend to support your family for 30 or 300 years, effective governance and risk management practices are crucial. They serve as the foundation for securing the longevity and sustainability of a family's wealth and legacy. The most effective approach to ensure you're correctly putting these seven practices into action is by hiring a professional. Opting for an experienced family office can significantly impact your peace of mind, simplify the complexities involved, and equip your family to effectively navigate any challenges that arise. This not only safeguards your family's future but also establishes a foundation for wealth that will extend to generations yet to come.
About the Authors
Christopher Beringer
Chris has extensive experience advising high net worth families establishing family offices and/or family investment companies, in regard to feasibility, design, staffing, transitioning and IT operations.
Delaney George
Delaney leads the marketing department’s day-to-day operations. In her role, she spearheads marketing initiatives, collaborates with buying groups, and has achieved success with multiple campaigns, significantly boosting lead generation. She also contributes to the investment team, focusing on manager research, technology solutions and setting/implementing trust distribution policies. She is a West Chester University graduate.